Blockchain for Lawyers 101: Part 2

If internet-based technologies confounded lawyers 20 years ago (and continue to confound many of those who regulate our practice), blockchain promises to be a real mind-blower, my friends.

The evolution of distributed ledger platforms such as blockchain will offer lawyers one of two choices: (1) disregard in an attempt to maintain the status quo, or (2) understand and adapt into our practices. I suggest (2) is the prudent course of action for those lawyers not planning to retire by 2020. Here’s why:

In Part 1 of this series , I offered an overview of blockchain technology from the perspective of why lawyers should care. I also canvassed many ways blockchain is impacting clients of the legal profession, from the music to financial to healthcare to energy industries.

The primary take-away from Part 1: blockchain’s impact and reach is far and wide. As a technology platform, it’s positioned to become as ubiquitous as the internet, something we don’t see or even think about, but that affects many, many things that we (and our clients) do.

So, knowing this, what can we lawyers do now to both better serve our clients and protect (or dare I say grow) our business? The boon of blockchain is that it offers both opportunities, simultaneously — to those who take the time to understand.

Still too nascent to predict its full impact with great certainty, consider the following implications of blockchain for legal professionals:

How will blockchain impact the “traditional” practice of law?

If you represent clients in blockchain-affected industries (and I’m hard-pressed to name an industry that isn’t), you become an even greater resource as trusted adviser by understanding blockchain within the context of your client’s business.

Being so nascent, blockchain presents an incredible (unique, even) opportunity for lawyers to position themselves as trusted strategic advisors to clients navigating the myriad legal, regulatory, and logistical webs surrounding the technology and its applications. I suggest that a lawyer serving the music industry, for example, makes herself an invaluable part of a client’s core team if she understands blockchain, how it affects her client, and how her client can capitalize on the technology.

Why? Because the lawyer as trusted advisor is situated differently than others most likely to have blockchain savvy (e.g. IT advisors). Yes, IT knows the technology (maybe). But only the lawyer can extrapolate from the technological understanding to what this really means for a client operating in a law- and regulation-bound environment.

Here are a few industry-specific examples of how lawyers can become trusted blockchain advisors to clients, within the context of an existing practice:

FINANCE

The shift to blockchain supported applications is happening fastest in the financial industry, which operates as a de facto proof of concept for blockchain in business generally. Blockchain has many finance use cases, including transforming regulatory oversight of transactions by giving regulators constant and real-time access to audit and monitor industry participants. Another use already happening and likely to proliferate: stock trading on blockchain platforms. (Overstock.com closed its first day of blockchain-based trades on December 16, 2016.)

With so many possible applications in development, finance industry clients are scrambling now to understand (a) how blockchain will impact the very structure of their businesses, and (b) how to capitalize on it. Enter the blockchain-savvy lawyer, who is best situated to help clients answer these questions — now.

INSURANCE

The insurance industry is embracing blockchain, too. In late 2016, a group of industry leaders formed the Blockchain Insurance Industry Initiative B3i (“B3i”) to explore the potential of distributed ledger technology (e.g. blockchain) and gain insight into how it can be used in the insurance market. Specifically, B3i is focused on a proof-of-concept for use in the industry.

Here, we’ll see impact on the retail side, where the industry can use blockchain to simplify the claims process, remove friction in underwriting and handling of claims, and thereby reduce operational expenses. On the wholesale side, blockchain — combined with the Internet of Things and smart contracts — presents many opportunities to create entirely new products (e.g. microinsurance) and underwriting processes.

The existence of B3i confirms the reality: blockchain utilization is happening in the insurance industry. And as a regulated industry, insurance clients will need their legal counsel to understand how this technology is transforming the industry both operationally and substantively. Those who are prepared for this transformation will be invaluable trusted advisors to these clients.

ENTERTAINMENT

I’m combining various entertainment industries (music, film, publishing) into one category primarily because blockchain’s impact on all has very similar import: revolutionizing how intellectual property rights in creative works are registered and enforced, and how the holders of these rights are compensated.

Blockchain provides a structure uniquely suited to protect IP rights through a secure, immutable, and real-time platform for creation and distribution of creative works, giving IP owners a level of control previously unavailable. This isn’t theoretical — music platforms Ujo Music, PeerTracks, and Bittunes are taking distribution and monetization onto the blockchain now.

These platforms pose a challenge to traditional distribution systems, who themselves are no doubt trying to jump on the blockchain bandwagon. And they also potentially upend modes of IP rights enforcement, through the very structure of how creative works are registered and sold/shared. Are you prepared to advise your clients on what changes are coming to IP laws and regulation in the US and worldwide, thanks to blockchain?

The U.S. Department of Commerce’s Internet Policy Taskforce held a public meeting (Developing the Digital Marketplace) in December of 2016, to discuss the concept of interoperability between digital (including blockchain) registries for IP. No longer theoretical, the future of blockchain in IP is now.

How do you serve your clients? Do some research. Start figuring it out. Offer advice before you’re asked for it (because you will be asked about blockchain). Offer value to your clients and secure your stream of business, all at the same time.

What new practice areas/business models will be created as use of blockchain proliferates? The opportunities outlined above exist today. Not all of the following opportunities currently exist in practical application — but they will when blockchain adoption becomes widespread.

THE SMART CONTRACT FIRM

Lawyers, who provide the legal knowledge of contract structure and enforcement;

Software Developers, who provide the software engineering knowledge to translate legal constructs into self-executing transactional structures using blockchain, the Internet of Things, and more; and

Software Coders/Programers, who do the actual work of creating the coded “terms” of the contract conceived through the collaboration of lawyers and software developers.

The smart contract firm represents not only a new practice model, but also a new business model. We all know the billable hour is (almost) dead, but what comes next? Lawyers will have to figure out payment models for the smart contract firm — taking into account not only the value of legal expertise, but the technical value as well as related services such as hosting of dynamic transactions on a blockchain platform.

Is it possible for a single lawyer to master blockchain development and coding, have the requisite legal knowledge, and thus be able to handle all aspects of smart contract development? Well, anything is possible. However, I suggest a team with the requisite multidisciplinary skills is a far more practical approach.

A side note: contracts on a blockchain look very different than contracts on paper. There is ongoing discussion as to whether they are contracts at all and some prefer terms like “dynamic transaction,” which may in fact be better descriptors. A blockchain-supported transaction may start from a series of clauses drafted according to traditional contract doctrine, but as these clauses move onto a blockchain platform and become self-executing, doctrine becomes obscured (e.g. how to terminate a self-executing smart contract transaction on the grounds of unconscionability?). Expect smart contract (or dynamic transaction) doctrine to evolve and look (potentially) very different from the doctrine we now know.

THE SMART CONTRACT MEDIATOR

Credit goes to Don Tapscott, author of Blockchain Revolution, for coining the phrase “smart contract mediator” (“SCM”). Due to the self-enforcing nature of smart contracts, the nexus of disputes in transactions potentially will shift to the stage of dynamic execution. Lawyers with deep blockchain knowledge can act as mediators in this process, helping parties to navigate the smart contract process.

The SCM practice niche exists independently from the smart contract law firm described above. While the SCM may participate in creating smart contracts (in a smart contract firm), the role can focus more on resolving disputes and general legal management of the transaction during the contract execution phase rather than the front-end work of drafting.

A smart contract looks and acts very different from a static contract, and understanding distributed ledger technology is critical to managing this process for clients. This is the smart contract mediator’s unique value proposition.

THE SMART TITLE COMPANY

Many of the industries and practice areas discussed so far apply primarily to those practicing in Big Law and representing large entities — though I would argue that blockchain is yet another technology that flattens opportunities and invites agile individual attorneys and small firms into the competition for business.

An opportunity for an industry often comprised of solos and small firms also exists: in title transactions, specifically residential real estate closings. Perhaps counter-intuitive, the opportunity lies in the threat blockchain poses to the typical title attorney.

Recall from Part 1 in this series that blockchain creates a trustless ledger, which means the need for roles typically performed by a title attorney as trusted intermediary disappear. It’s no longer necessary to hold funds in escrow, pending the performance of certain actions in the transaction, because release of funds is self-executing. Traditional title searches won’t be necessary when deeds and related documents move to the blockchain. Notary publics will serve no purpose because data on the blockchain is automatically verified and date- and time-stamped by the system itself.

The net affect: an amazing amount of friction that currently adds tremendous time and cost may likely disappear from real estate transactions.

The smart title attorney who understands how blockchain transforms the real estate transaction process positions himself to create a smart title company, which will bear much resemblance to a smart contract firm but with a particular emphasis on real estate transactions.

A similar opportunity exists to create a firm providing blockchain-based services for large, complex commercial real estate transactions. Imagine transforming the diligence process into a dynamic smart transaction, providing real-time access to critical information (audits, environmental reports, surveys, etc.) to all parties. Introducing this level of transparency, and (theoretically, at least) eliminating typical delays in diligence could bring tremendous benefit to clients who participate in these transactions.

My prediction: build a cost-effective, transparent, and (nearly) frictionless real estate transaction platform on the blockchain, and they (clients) will come.

Groups such as Common Accord (commonaccord.org) have formed initiatives to give open access to the tools (e.g. code) necessary to transact on the blockchain. These efforts, and open access to them, create tremendous opportunities for lawyers to utilize blockchain technology to create software and platforms for delivering legal services.

THE LEDGER LAWYER: BLOCKCHAIN LAW AND POLICY ADVISOR

What is your primary practice subject matter area? Blockchain likely offers applications directly impacting the clients you serve. And this has the potential to fundamentally shift how law, policy, and regulation evolve in that given area.

Become a blockchain expert now,what I call a “ledger lawyer”, and you are poised to be a primary contributor to the evolution of law, policy, and regulation surrounding the use of blockchain. While some may argue that it’s too late to become a go-to ledger lawyer, I disagree.

The hype of blockchain is just now translating into tangible applications. Many industries are still in proof of concept mode meaning that blockchain is being tested, but adoption is far from widespread. And, perhaps more importantly: lawmakers, policy makers, and regulators are in the very early stages of understanding what changes blockchain may engender. For these reasons, I suggest that now is the perfect time to position yourself as a ledger lawyer — a recognized blockchain law and policy advisor in your practice area.

In Part 1 of this series I noted five key benefits blockchain provides to the healthcare industry*:

•reduces cost

•increases speed

•increases security

•reduces fraud

•reduces risk

I suggest that these benefits inure equally to application of blockchain in legal transactions. Use these as starting points for exploring with clients how the technology can capitalize on these benefits within the client’s industry. For example, can moving to a blockchain-based payment system reduce risk and fraud for your retail industry client?

Conclusion: The Future of Blockchain Is Now

My survey of blockchain’s impact on existing and new practice areas is admittedly (barely) scratching the surface. Corporate lawyers should be learning about blockchain-based decentralized autonomous organizations (DAOs), and how these may replace traditional business structures. Those with a criminal law practice should be thinking about how “evidence” located in a blockchain impacts a case — for example, what does this mean for application of the third party doctrine? I could go on and on (and perhaps I will in part 3 of this series).

For now I’ll conclude by pointing out the obvious: the future of blockchain is now. And its very nature threatens to render the traditional role of lawyer as trusted intermediary obsolete. At the same time, it offers many new practice opportunities for a blockchain-savvy lawyer. How do you redefine your value proposition in the age of blockchain? Answer this question and your future is secure. Ignore it at your peril.

If you’re interested in a deeper dive into blockchain, Vanderbilt Law School’s Program on Law and Innovation is hosting a Blockchain and Law conference on April 7, 2017, at Vanderbilt, where 20+ blockchain experts across industries will deliver a series of TED-style talks on all things blockchain and the law.